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    woodyp20's Avatar
    woodyp20 Posts: 12, Reputation: 1
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    #1

    Feb 17, 2011, 12:06 AM
    APR to actual interest problem
    The State Employees' Credit Union offers a 1-year certificate of deposit with an APR (or effective rate) of 4.5%. If interest is compounded quarterly, find the actual interest rate. Round to the nearest tenth of a percent.
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    ebaines Posts: 12,131, Reputation: 1307
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    Feb 17, 2011, 07:09 AM

    Here's what you do: since inerest is paid quarterly, you divide the APR by 4 to find the interest rate per quarter. For each quarter you multipy that quarter's starting balance by (1+0.045/4). Given $1 invested at the start of the first quarter, at the end of the first quarter you have $1 x (1+0.045/4). That's your starting amount for quarter number 2. Then at the end of the 2nd quarter you multiply your starting amount by (1+0.045/4) again, to get a total of $1 x (1+0.045/4)^2. Repeat this process for quarters 3 and 4. When you get through quarter 4 you determine the actual annual interest rate paid by taking the final amount, subtracting the original amount of $1, divide by the initial amount of $1, and convert to a percentage. Post back with your answer and we'll check it for you.
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